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Buying a home in New York City is a thrilling yet complex process. It involves navigating the competitive market, securing financing, and dealing with contingencies that could impact the finalization of your dream home purchase. Contingent offers are a common feature of real estate deals, providing buyers with certain protections but also carrying inherent risks that both buyers and sellers should be aware of.
Contingencies are essentially conditions that must be met for the sale to proceed. The offer may fall through if these conditions are not fulfilled within a specified timeframe, leaving both parties back at square one. While it’s true that contingent offers fall through less than 5%, it’s essential to understand how different contingencies can affect your deal and what precautions you can take to ensure a successful transaction. We also discuss when contingencies are a disadvantage, such as in a bidding war or against an all-cash deal.
Home Sale ContingencyHome Sale Contingency
When buyers plan to purchase a new home but need to sell their existing one first, a home sale contingency is often included in the offer. This contingency gives buyers a certain period to find a buyer for their current property. If they fail to do so, the offer may be voided. Understandably, many sellers are reluctant to accept this contingency due to the uncertainty it introduces. To increase the likelihood of acceptance, buyers must act swiftly to sell their current home or be prepared to lose their dream property.
To make a home sale contingency more appealing to sellers, buyers should demonstrate that their existing property is market-ready and reasonably priced. They can also consider obtaining bridge financing to close the deal without relying on the proceeds from their current home’s sale. A home sale contingency is the least accepted in New York City, and we recommend not including it when making an offer.
Mortgage Financing ContingencyMortgage Financing Contingency
A financing contingency is dependent on the approval of a loan. The deal could collapse if a buyer’s lender doesn’t approve the loan. Most homebuyers rely on mortgages to finance their purchase, so financing contingencies are among the most common reasons for offers falling through. To mitigate this risk, buyers should obtain pre-approval from a reputable lender before making an offer, ensuring they better understand their budget and increase the likelihood of loan approval.
Home Inspection ContingencyHome Inspection Contingency
Home inspections are vital for single-family homes and townhouses, uncovering potential hidden issues. If significant problems surface during the inspection and the seller doesn’t address them adequately, buyers might reconsider the deal. However, for condos and co-ops in NYC, inspections may not be essential, except for older properties or those on the ground or top floors, where unique risks outside the apartment are possible. Instead of adding the contingency risk, we recommend having a home inspection during the due diligence period; this would enable you to understand any issues and whether they are worth renegotiating, walking away, or proceeding with the deal if nothing serious is found.
Title ContingencyTitle Contingency
A title contingency ensures the property’s title is clear and free of liens or encumbrances. If problems arise with the title, such as unresolved liens or ownership disputes, the offer could be at risk of falling through. To avoid this, buyers should conduct a thorough title search and obtain title insurance, providing them with financial protection should any title issues emerge.
Appraisal ContingencyAppraisal Contingency
Appraisal contingencies protect buyers and lenders from overpaying for a property. If the home’s appraised value exceeds the agreed-upon price, the buyer’s lender may deny the loan or require the buyer to cover the difference. To minimize this risk, before submitting an offer, buyers should have their buyer’s agent run a comparable market analysis and perform market research to ensure they make a fair offer in line with the property’s actual value.
First Right of Refusal ContingencyFirst Right of Refusal Contingency
The first right of refusal contingency allows sellers to continue marketing their property after receiving an offer. If a better offer comes in, the original buyer has a limited time to proceed with the purchase or step aside for the second offer. While this can benefit sellers, buyers should be prepared to act quickly to secure the property.
Bidding WarsBidding Wars
Bidding wars are common in popular NYC neighborhoods with limited housing inventory. In such scenarios, multiple buyers are vying for the same property, often increasing prices. While contingent offers are still considered, they might be less appealing to sellers seeking a quick and straightforward transaction. In a bidding war, sellers may prioritize non-contingent offers, as they present a higher level of certainty and reduce the risk of the deal falling through due to financing, inspections, or other contingencies. To remain competitive, buyers may consider waiving certain contingencies or offering more money and favorable terms to make their offer stand out.
Best and Final OffersBest and Final Offers
When sellers request the best and final offers, all potential buyers are given one last opportunity to submit their highest and best competitive offers. During this process, sellers seek the most attractive offer that maximizes their return while minimizing potential complications. In this high-pressure situation, buyers with contingent offers might be disadvantaged. While some contingencies may not heavily impact the decision, others, like appraisal contingencies, financing, or home sale contingencies, could make the offer less appealing to sellers. In such cases, buyers might need to carefully weigh the risks and consider adjusting their offer terms to reduce the likely hood of their contingent offer falling through.
Cash Offers with No ContingencyCash Offers with No Contingency
Cash offers with no contingencies are highly desirable to sellers, providing a seamless and quick transaction with reduced uncertainty. Without financing approval or other contingencies, cash buyers can often close the deal faster, appealing to sellers who want to expedite the selling process. In competitive markets like NYC, cash offers can significantly outshine contingent offers, leaving buyers with mortgage-dependent offers at a disadvantage. Buyers facing cash offers may consider alternatives, such as no contingencies or other incentives, to make their proposal more enticing to sellers.
Bottom LineBottom Line
In summary, contingent offers can fall most during bidding wars, best and final situations, or when competing against cash offers with no contingencies. In such scenarios, buyers may need to strategically adjust their offer terms, provide additional assurances, or explore creative solutions to make their offers more attractive to sellers. Conversely, sellers should carefully assess the risks and benefits of accepting contingent offers, considering market conditions, their timeline, and the overall attractiveness of each proposal. By understanding the dynamics of contingent offers in competitive markets, buyers and sellers can navigate the process more effectively and increase the likelihood of successful real estate transactions.